MGMW HW Set #2

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Texas A&M University *

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Economics

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Feb 20, 2024

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Homework Set #2 Problem 1 Custom Granite has the following information available for the past year: Raw Materials purchased $480,000 Direct Labor cost incurred(at $20/hr) $840,000 Variable O/H applied based on $12/DL hour Fixed O/H applied based on machine hours used Estimated Fixed Overhead $624,000 Estimated Machine hours 48,000 Actual Machine hours 44,000 Actual General and Administrative Exp $640,000 Inventory balances were as follows: Beginning of year End of year Raw Materials 78,000 54,000 Work in Process 66,000 103,000 Finished Goods 208,000 244,000 Required: a. Calculate the variable overhead applied to Work in Process b. Calculate the predetermined fixed overhead rate c. Calculate the Cost of Goods Manufactured d. Calculate the Cost of Goods Sold

Problem 2 Baker Corporation is currently working on two projects that have considerable overlap in the use of equipment and materials. For example, Brian is renting a bulldozer with a minimum lease time of one day and will be able to use it on both projects during the one-day period. The cost of the bulldozer is $8,000 per day (12 hours) and Brian expects that moving the bulldozer from Project One to Project Two will take approximately two hours. Brian provides the following additional data: Project One Project Two Total cost of completing project $77,000 $125,000 Estimated total cost of material used on project $35,000 $20,000 Estimated total cost of labor used on project $25,000 $40,000 Estimated hours of bulldozer use on project 6 hours 2 hours Required: a. Calculate the cost of the bulldozer allocated to the two projects using budgeted hours of bulldozer use as the allocation basis. b. Calculate the cost of the bulldozer allocated to the two projects using the total cost of labor used on the project as the allocation basis. c. Which of the above allocation basis should Brian use? Why? d. Assume you a project manager for Project Two and are going to be evaluated based on the profitability of the project. Which allocation base would you prefer? Justify to your boss why you think allocating the cost of the bulldozer based on that allocation base would be the best allocation basis.

Problem 3 Preppy Co. makes and sells a single product. The current selling price is $30 per unit. Variable costs are $21 per unit, and fixed expenses total $90,000 per month. Sales volume for July totaled 12,000 units. a. Calculate operating income for July b. Calculate the break-even point in units sold and total revenues c. Management is considering the use of automated production equipment. If this were done, variable costs would drop to $15.00 per unit, but fixed expenses would increase to $100,000 per month. d. Calculate operating income at a volume of 12,000 units per month with the new cost structure e. Calculate the breakeven point in dollars with the new cost structure [newbreakeven] Problem 4 Springer Sports Company manufactures ultra-lite badminton rackets. The rackets are sold exclusively online. Each racket sells for $20 ($16 plus $4 shipping and handling.) Springer’s contribution margin ratio is 60%. Springer calculates breakeven units to be 4,000 per month. a. What is the unit variable cost of a badminton racket? b. What is Springer’s monthly fixed cost? c. Suppose Springer introduces an offer for “free” shipping and handling. How many additional rods will Springer have to sell each month to break even? Problem 5 Oliver ’s Restaurant Oliver’s English Hut (Oliver’s) is a restaurant which generated $60,000 in revenue last month, 55% of which came from the sale of alcoholic beverages and 45% of which came from the sale of food items. On average, alcoholic beverages sell for $4 and have a variable cost of $2; the average food item sells for $5 and has a variable cost of $4. Oliver’s fixed cost for the month totaled $10,950. Oliver’s recent operating results present the proprietors with a dilemma. Specifically, for state licensing purposes Oliver’s currently is classified as a “restaurant” and, as such, as the appropriate liquor license associated with this status – Class B. Under a Class B license, alcohol sales must

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not exceed 50% of total revenue – otherwise, Oliver’s would be classified as a bar, a classification that requires a Class A liquor license. Currently, Oliver’s pays $150 per month for its Class B liquor license; this cost is included in the fixed cost of $10,950 above. Oliver’s proprietors would have to pay an additional $850 per month for a Class A liquor license. Furthermore, Oliver’s liquor liability insurance premiums would increase by $318 per month if the establishment is licensed as a bar rather than a restaurant. In terms of moving forward, the proprietors of Oliver’s have discussed the following three options. Option 1: Change the licensing status of the establishment from restaurant to bar. This option would entail obtaining a Class A liquor license and paying the increased monthly licensing fees and insurance premiums. Oliver’s would plan on selling alcohol and food at their current sales— mix percentages and levels (ke total revenue and the proportion associated with food and alcohol would not change. Option 2: Close the restaurant one-half hour earlier each night. This option would reduce the alcohol sales such that the alcohol sales exactly equal the current level of food sales (i.e. the reve nue from each of the two products would be equal.) In addition, it would reduce Oliver’s fixed costs by $450 per month. Finally, Oliver’s would continue to operate as a restaurant under its Class B license. Option 3: Offer a brunch on Saturday and Sunday mornings (no alcohol would be served at the brunch). To ensure that the revenues from the brunch are sufficient to bring up food sales to equal current alcohol revenue, Oliver’s would need to price each brunch at $4. Unfortunately, Oliver’s has deter mined that the variable cost of offering the brunch(including labor, food, etc.) will be $4.08 per brunch and that fixed costs will increase by $105 per month. However, a benefit of offering the brunch is that Oliver’s could continue to operate under its class B license. Required: a. Calculate Oliver’s profit and breakeven point for the most recent month (before considering the options). THE SOLUTION TO THIS PART IS POSTED PLEASE DO IT ON YOUR OWN FIRST, IT IS JUST THERE TO CHECK YOUR WORK b. Calculate Oliver’s monthly profit and breakeven revenue under option 1. c. Calculate Oliver’s monthly profit and breakeven revenue under option 2. d. Calculate Oliver’s monthly profit and breakeven revenue under option 3. e. Prepare a brief paragraph or two discussing the key insights Oliver’s has learned. Can you link these insights to some commonly observed business practices? Try listing some examples

Problem 6 Kai Kalani owns a company that manufactures and sells fishing rods. Kai’s latest creation is the Bass-O-Matic, a graphite fishing rod designed with a trigger-stick Portuguese cork handle and Kai’s revolutionary titanium guide system. Compared to other fishing rods o n the market, Kai believes her Bass-O-Matic not only will reduce hand and arm fatigue but also will allow anglers to make longer and more precise casts with smoother retrieves. Kai can make the Bass-O-Matic with one of two available technologies. The first technology is a labor-intensive technology; if Kai chooses this technology, then she will incur fixed costs of $500,000 per year and a variable cost of $50 per fishing rod. The second technology is a capital-intensive technology; if Kai chooses this technology, then she will incur fixed costs of $2,500,000 per year and a variable cost of $25 per fishing rod. Both technologies lead to identical product quality and an identical selling price of $75 per fishing rod. Required: a. What is Kai’s breakeven poin t in units with the labor- intensive technology? What is Kai’s breakeven point in units with the capital-intensive technology? b. Which technology is preferred if sales are expected to be 40,000 units? Which technology is preferred if sales are expected to be 90,000 units? At what sales level would the two technologies yield identical profit? c. On the same graph, draw a profit line for each of the two technologies (Hint: Measure profit on the y-axis and quantity in units on the x-axis; allow quantity to range from 0 to 100,000 units in increments of 20,000 units.) Using your graph, intuitively explain your answer to part (b) above. d. Suppose Kai believes that there is a 50% chance that sales will equal 40,000 units and a 50% chance that sales will equal 90,000 units. What is Kai’s expected profit with the labor -intensive technology? What is Kai’s expected profit with the machine -intensive technology? (Hint: Expected profit is the average of the profit for the two demand estimates.) e. What is the range of profit (using 40,000 and 90,000 as the lowest and highest possible demand estimates) under each technology? Which technology has the greater range in profit? Explain your answer using the profit graph you constructed earlier. What inference do you draw about the variability of profit under the two technologies? (Hint: Range is a statistical term for the difference between the highest and lowest values of a distribution.)

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